Friday, November 9, 2012

Direct government student loans exceed half a trillion; higher education costs out of control

The report on consumer credit from the Fed today showed another sharp increase in government financed student loans. The balance now exceeds half a trillion dollars, which is in addition to the student loans guaranteed (but not funded) by the federal government. Consumer credit is once again driven by this sector, as credit card balances actually declined.

Econoday: - Another big increase in student loans drove consumer credit higher, up $11.4 billion vs August's very large revised gain of $18.4 billion. The non-revolving component, home to the student loan category, rose $14.3 billion in the month on top of August's $14.1 billion gain. Revolving credit, where credit card debt is tracked, actually fell, down $2.9 billion for the third decrease in four months.

Source: FRB

In an attempt to address the problem of rapidly rising student indebtedness, the U.S. Department of Education made it easier to repay student loans taken out from now on.

WSJ: - The U.S. Department of Education last week issued the final regulations for the new, more-generous student-loan repayment program announced by the president last October. The plan, known as “Pay as You Earn,” will allow some graduates to peg their federal loan payments to 10% of their discretionary income and then have any remaining balance forgiven after 20 years.

This effectively makes the taxpayer responsible for funding a larger portion of higher education costs. Clearly it is a worthy cause, except that most funds available to universities from external sources (with no strings attached) will be drawn and spent, often irrespective of the need. In fact most colleges will always have some financial needs, no matter how expensive the tuition is. Obviously a portion of the tuition increases are used to help students from low income households, but middle class families are forced to pay more as a result. And the only way many middle class families can make these tuition payments is by tapping student loans in ever-larger amounts.

Unfortunately colleges often raise tuition simply because they can or because their competitors are doing it. Very few private sector enterprises enjoy (on a large scale) the benefits of products with such inelastic demand (courtesy of the US taxpayers). And items such as fuel, cigarettes, and some pharmaceuticals, which may fall into this category, are heavily taxed and/or regulated.

To put things in perspective, take a school like Boston University for example (very good university by the way). Here are the costs per year to attend as an undergraduate:

Source: BU

BU's tuition cost is by no means unusual. This is at the time when the private sector is struggling and US personal income growth has stalled (see discussion).

With the taxpayer funding higher education in such an unlimited fashion, it is time to put spending and tuition caps on institutions that benefit from this massive government program. Loans should be given only to those students who are enrolled at qualified institutions that curtail spending and tuition increases. That would limit the taxpayer burden as well as student indebtedness, which is currently growing uncontrollably. The rest of the academic establishments should finally face reality and start competing for student dollars without the benefit of taxpayer assistance.